State ex rel. Turner v. Younker Bros., Inc.

• Decision Date: 19 September 1973
• Docket Number: No. 55622,55622
• Citation: 210 N.W.2d 550
• Parties: STATE of Iowa ex rel. Richard C. TURNER, Attorney General of Iowa, Appellant, v. YOUNKER BROTHERS, INC., Appellee.
• Court: Iowa Supreme Court

Page 550

210 N.W.2d 550

STATE of Iowa ex rel. Richard C. TURNER, Attorney General of Iowa, Appellant, v. YOUNKER BROTHERS, INC., Appellee.

No. 55622.

Supreme Court of Iowa.

Sept. 19, 1973.

Rehearing Denied Nov. 9, 1973.

Richard C. Turner, Atty. Gen., and Harry M. Griger, Asst. Atty. Gen., for appellant.

John G. Fletcher and Bennett A. Webster, Des Moines, for appellee.

Heard and considered en banc.

MASON, Justice.

The ultimate question presented by this appeal is whether credit sales between Younker Brothers, Inc. (Younkers), defendant in this action, and its customers result in usury prohibited by Iowa statutes.

Since 1965 Younkers, a retail department store doing business throughout Iowa with its principal place of business in Des Moines, has extended to persons who purchase its merchandise consumer credit through the use of a typical revolving (option) charge plan that operates as follows: the customer and Younkers enter into an agreement which permits the customer to make further credit purchases for an indefinite period of time without the necessity of entering into a new contract at the time of cash purchase. If the customer decides to charge an item, rather than make an immediate payment of the cash price, he merely presents his charge card or plate to the sales clerk and signs the credit slip. The transaction is then recorded on the customer's account in accordance with the terms of the pre-existing agreement. The customer can avoid any 'finance charge' on the price of the purchase by paying the full cash price within thirty days after billing. However, at the expiration of that period the unpaid amount of the cash price is added to the previous balance of the customer's account to arrive at an unpaid balance on which a 'finance charge' of 1 1/2 percent is assessed. Payments made on the account and credits for returned merchandise are deducted from the unpaid balance and purchases made during the current billing period are not considered in determining that month's balance. Younkers mails the customer a monthly statement of his account and he must pay a minimum amount of $10 or ten percent of the unpaid balance, whichever is the greater, for that month. As long as the customer makes such payments he or she could continue to make purchases on the revolving charge plan and continue to be assessed by and pay to Younkers the 'finance charge.' Hence, a customer paying such a monthly 'finance charge' may be assessed 18 percent annually, which is well above the maximum rate permitted as an 'interest' charge under the Iowa usury laws.

Another type of credit agreement primarily used by Younkers and its customers for the purchase of single, more expensive items of merchandise such as TVs, major appliances or furniture is the retail installment contract. In retail installment sale transactions the customer enters into a specific written contract for a particular item or items and agrees to pay the unpaid portion of the cash price and an additional 'finance charge' of.$9.00 per $100 per year of the unpaid cash price, within a specified period of time between three and thirty-six months after the date of purchase. The resultant charge is equivalent to 16.25 percent annually, which is also greater than the maximum permissible 'interest charge' under our usury laws. In the event the customer would pay in advance the unpaid balance of the installment contract Younkers would give a partial refund based on a fixed formula to the customers of the finance charge. Although Younkers does not have the right to accelerate the payment of the monthly installments based on the unpaid balance plus the 'finance charge,' it does retain property rights in the goods sold, together with all of the concomitant rights accorded a seller under the Uniform Commercial Code, chapter 554, The Code.

The retail installment contract has been used by Younkers for a number of years.

Plaintiffs, State of Iowa on the relation of Richard C. Turner, its attorney general, and Richard C. Turner in his individual capacity, initiated this proceeding as a class action to have Younkers' two credit plans declared usurious for the reason both exacted an 'interest' charge in excess of the rate permissible under sections 535.4 and 535.2, The Code, 1971.

Section 535.4 provides:

'Illegal rate prohibited--usury. No person shall, directly or indirectly, receive in money or in any other thing, or in any manner, any greater sum or value for the loan of money, or upon contract founded upon any sale or loan of real or personal property, than is in this chapter prescribed.'

And section 535.2 reads in part as follows:

'Rate of Interest.

'1. * * * (T)he rate of interest shall be five cents on the hundred by the year in the following cases, unless the parties shall agree in writing for the payment of interest not exceeding nine cents on the hundred by the year:

'a. Money due by express contract.

'* * *.

'f. Money due upon open accounts after six months from the date of the last item.'

In Weinrich v. Hawley, 236 Iowa 652, 659, 19 N.W.2d 665, 669, the court defined interest as 'the compensation fixed by the parties or allowed by the law for the use of money, or as damages for its detention.' See also Iowa Loan Co. v. Matthews, 126 Iowa 743, 102 N.W. 817 and Smith, Twogood & Co. c. Coopers & Clarke, 9 Iowa 376.

45 Am.Jur.2d, interest and Usury, section 1, has this definition: 'Interest is the compensation allowed by law, or fixed by the parties, for the use, detention, or forbearance of money or its equivalent.'

Interest is also defined in 47 C.J.S Interest § 1, as, '* * * the compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention.'

Plaintiffs alleged Younkers' conduct constituted a public nuisance and sought to enjoin the company from selling goods under either the revolving charge account or the retail installment contract; to 'recover judgment against defendant in a sum equal to all interest and finance charges illegally imposed on defendant's customers since May, 1969'; to impose a constructive trust upon the judgment and customers' money in Younkers' hands, and to credit payments of all usurious interest made by each customer to his or her principal due under said customer's contract or open account with Younkers. All allegations concerning a class action, recovery of alleged usurious interest and credit for all usurious interest paid were stricken from plaintiffs' amended petition by the trial court. Younkers answered that its 'finance charge' as calculated under both credit plans was a time-price differential and not subject to the usury statutes.

The trial court rejected plaintiffs' contentions and denied their request for injunctive relief. In deciding the annual 'finance charge' of 16.25 percent under the retail installment contract is not usurious, the court found the Iowa supreme court in Gilmore & Smith v. Ferguson & Cassell, 28 Iowa 220 (1869), amended the language of the operative usury statute to include the time-price doctrine, which generally exempts sales of goods from the application of usury statutes. The court further held the revolving charge account plan does not violate the usury laws, as it too is exempt under the time-price doctrine.

Plaintiffs have appealed asserting three issues for review: (1) the trial court incorrectly held that Younkers' revolving charge option account and retail installment contracts are not usurious under chapter 535, Code of Iowa, 1971; (2) Younkers' violations of the Iowa usury law constitute a public nuisance which should be enjoined; and (3) the trial court incorrectly held that plaintiffs' petition and three amendments thereto failed to state a proper class action for the recovery of past payments of usurious interest.

I. Plaintiffs urge three principal contentions as their first issue for review: (a) the time-price doctrine does not obtain in Iowa in light of the language of section 535.4, supra; (b) assuming the time-price

doctrine is in force, neither of Younkers' credit plans effects a bona fide time-price sale of property; and (c) an intention to violate the usury laws, one of the essential elements of a usury, is present in the instant case.

(A) Construction of section 535.4, The Code.

The common law has never forbidden the exaction of usury as a matter of general law, and at the present time any rate of interest agreed upon by the parties is legal in the absence of statute. 4 Am.Jur.2d, Interest and Usury, section 4. However, most states have enacted statutes regulating the mater of interest, which generally have been construed to define usury as consisting of four essential elements: (1) a loan or forbearance, either express or implied, of money or of something circulating as such; (2) an understanding between the parties that the principal shall be repayable absolutely; (3) the exaction of a greater profit than is allowed by law; and (4) an intention to violate the law. Id. at section 111.

Specifically, the first element indicates the kind of conduct or transaction commonly regulated by usury statutes. It is plaintiffs' belief section 535.4 applies not only to the loan or forbearance of money but also explicitly pertains to any credit sales transaction, whether the customer utilizes a revolving charge account or a retail installment contract. Plaintiffs focus on the specific reference in section 535.4 to contracts for the sale of goods, viz., 'or upon contract founded upon any sale or loan of real or personal property.'

Younkers argues the precise contention raised by plaintiffs was expressly rejected by this court over 100 years ago in Gilmore & Smith v. Ferguson & Cassell, 28 Iowa 220 (1869), which involved a contract to buy 196 sheep valued at $588. That amount was to be paid within one to four years. But the buyer was also required to pay one and a half pounds of wool per head annually until he paid the...